Virginia Company's total costs of operating five sales offices last year were $500,000,of which $70,000 represented fixed costs.Virginia has determined that total costs are significantly influenced by the number of sales offices operated.Last year's costs and number of sales offices can be used as the basis for predicting annual costs.What would be the budgeted cost for the coming year if Virginia were to operate seven sales offices? (CPA adapted)

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the variable cost per sales office:

Total costs - fixed costs = variable costs 
$500,000 - $70,000 = $430,000

Variable cost per sales office = $430,000 / 5 sales offices = $86,000

Using the variable cost per sales office, we can calculate the total cost for operating seven sales offices:

Total cost = ($86,000 per sales office) x 7 sales offices + $70,000 fixed costs 
Total cost = $602,000

Therefore, the budgeted cost for operating seven sales offices would be $672,000 (choice B).

Virginia Company's Total Costs of Operating Five Sales Offices Last